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Public Disclosure AuthorizedPublic Disclosure AuthorizedDOCUMENTOF INTERNATIONALBANKFOR NTASSOCIATIONNot ForPublicUseReportNo.APPRAISALOF THE THIRD POWER PROJECTINSTITUTODE RECURSOSHIDRAULICOSY ELECTRIFICACIONPANAMANovember9, 1973Public Disclosure AuthorizedPublic Disclosure AuthorizedFILECOPYRegionalProjectsDepartmentLatin America and the CaribbeanRegionalOfficeThis report was prepared for officialuse only by the BankGroup. It may not be published,quotedor cited without BankGroup authorization.TheBank Group does not accept responsibilityfor theaccuracyor completenessof the report.222a-PAN
ANDEQUIVALENTCURRENCYCurrency UnitUS 1.00 BalboaBl.00 (B)100 centesimosU2NITSAND MEASURESkW NWkWhGWhkVkVAMVA milesquare milekilowattMegawatt 1000 kWhourkilowattGigawatt hour - 1 million kWhkilo voltkilo volt - ampere 1000 kVAMegavolt-ampere1.609 km2.590 km2ACRONYMSFyLIRHEMAINPANCANAL-CompaniaPanamenade Fuerza y Luzy Electrificacionde Recursos HidraulicosInstitutoInc.Chas T. Main InternationalPanama Canal CompanyIRHE'S FISCAL YEARJanuary 1 - December 31
APPRAISALOF THE THIRD POWERPROJECTINSTITUTO DE RECURSOSHIIJRAULICOSY ELECTRIFICACICIPANAMATable of ContentsPage No.iSUMMARYANDCONCIUSIONS-1.INTRODUCTION12.THE POWERSECTOR3GeneralSector OrganizationRegulationSector FacilitiesExtension of the ElectricityPower Development Program3344453.4.5.6.7.SupplyTHE BORROWER7LegislationOrganizationand ManagementTariffsInsuranceAccountingand Audit77999THF PROJECT10IRHE's Expansion ProgramThe Bank ProjectTechnicalTrainingProjectCost EstimateEngineeringand ConstructionProcurement and DisbursementProject OJECT JUSTIFICATION17Least Cost Solutionaeturn on Projectand Program Investment1719FINANCIAL ASPECTS21Past Record and Present PositionFinancing PlanFinancial Forecasts212224AGREEMENTSREACHED AND RECOMWNDATICNS25This reportwas preparedby Messrs.iiAlan A.1-. Onslow and Helmut Wieseman.
LIST OF ANNEXESANNEXES1.Legislation2.InterconnectedSystem - Installedand Planned GeneratingCapacity 1972-823.InterconnectedSystem - Power and Energy Balance4.IRHE's Schedule of Loan Disbursements8.Load Forecasts9.Return on the Investmentof the Thi-rdPower Project1972-8210.Income tedIncome ps1972-82Sheets1969-1972-1972and ApplicationsSheets19731973Ratiosof Funds 197319781978--19781973 - 1978IBRD 10469-InstitutoIBRD 10470-MetropolitanDivisiony Electrificacionde RecursosHidraulicosy Electrificacion- Institutode RecursosHidraulicos
APPRAISALOF THE THIRD POWERPROJECTINSTITUTO DE RECURSOSHIDRAULICOSY ELECTRIFICACIONPANAMASUMMARYANDCONCLUSIONSi.This report covers the appraisal of a project forming part of the1973-77 expansion program of Institutode Recursos Hidraulicosy Electrificacion(IRHE), an autonomous agency of the Panamanian Government, charged with coordinating and expanding electricalpower generationand distributionthroughouttheRepublic.ii.This would be the Bank's third loan to IRHE. Loan 322-PAN, signed in1962, was one of the Bank's firstloans for rural electrificationand assistedIRHE in financingits expansion program in the Central provinces,includingtheconstructionof a small hydroelectricplant at La Yeguada with an installedcapacityof 6 MW. The second loan (661-PAN), signed in.1970,assistedIRHE in financingthe foreign exchange for the firststage of the Bayano hydroelectricdevelopment(150 MW) and associatedtransmissionline and substations;a 40 4Wsteam unitat Las Minas and transmissionline;6 MW of diesel in the rural areas; expansionof its distributionsystems; and studies,trainingand management consultants'services.The bulk of the second project(Bayano) is about one year behindschedule and the total projectlikelyto cost some 35% more than the originalestimate of US 58 million. The cost and time overruns,which affectthe twomain components of the project- Bayano and Las Minas - are due to variationsin foreign exchange rates since the appraisalin June 1969, to the poor qualityof the preliminaryengineeringstudies and field investigationsmade by IRHE'spreviousconsultants,to difficultiesin finding and quarryingsuitableaggregatesfor Bayano's civil works, and to additionalcivil works at Las Minas, which werefound to be necessary.Additionalto the 35% cost overrun,the civil workscontractorfor Bayano has recentlysubmittedclaims amounting to about US 6 milliondue to basaltinsteadof limestonenow being used as concreteaggregate.It isexpected that the loan will be fully drawn down by the originalclosing date ofApril 30, 1976, even though Las Minas will not be in operationuntil September 1974and Bayano in the firsthalf of 1976.iii.In December 1970, under a UNDP grant, a contractwas signed withChas. T. Main InternationalInc. of USA, for which the Bank was the executingagency, to make a Hydropower Development and FeasibilityStudy for Panama coveringthe period 1971-85.This Master Plan was finalizedin January 1973 and proposesa nationalpower grid by 1982 based on a hydro-thermalgenerationinstallationprogram.The Project,which is now proposed for Bank financingwill be carriedout during 1974-76 and is estimatedto cost a total of US 38.5 million equivalent.It forms part of IRHE's expansion program in accordancewith the Master Plan.IRHE'stotal constructionprogram during this period is estimatedto cost US 110 millionequivalent.It comprises ongoing works in the second Bank loan, the proposed Project,the initialstages of future generationexpansion and associatedworks, and otherexpansion of IRHE's system.iv.The ProjectincludesIRHE's 1974-76 transmissionand distributionprogram and a system load dispatchcenter,as well as studies,engineeringandtechnicaltraining.Due to the delay of the Bayano hydroplantto the firsthalfof 1976, 25 MWof generatingplant needs to be added by Aprll975to meet the projectedcapacityshortage in 1975-76 before Bayano is in operation.This 25 MWof generating
* ii-capacity would also form part of the Project and would representabout 10% of itscost.The transmissionwould include the integrationof isolatedregionalsystems,which is less costly than continuingto operate the systems separately;this, inconjunctionwith the supply of additionalload, following expansion of the distributionsystems, would produce a return on program investmentof at least 13%, if benefitsaremeasured by incrementalrevenue attributableto the program and financialcostsare adjusted for taxes, inflation,and internaltransfers.v.The loan would finance the foreign exchange component of the projectcost.Internationalcompetitivebidding would be used to contractfor otherwork than consultants'servicesand training.Except for the engagement ofconsultantsfor bid preparationfor the 25 MWthermal generationand for theproposed 115 kV lines and substations- for which retroactivefinancingtoMarch 31, 1973, to a maximum of US 300,000is proposed - no contractsare expectedto be awarded before the signing of the loan. Nevertheless,the proposed loanprovides additionalretroactivefinancingin an amount up to US 500,000, in caseIRHE is in a position to place the order for the 25 MW of generatingcapacityprior to loan signing.vi.Following the "intervention"in June 1972 of Compania PanamenadeFuerza y Luz (FyL), a subsidiaryof Boise Cascade (USA) which had the concessionsfor electricity,telephonesand gas in the cities of Panama and Colon, theGovernmentbought FyL's assets and liabilities,and, on August 1, 1972 handedthem over to IRHE. It has been decided by the Governmentthat these telephoneactivitieswill be transferredfrom IRHE by December 31, 1973, and that the gasactivitieswill be phased out by June 1974, leaving IRHE responsibleonly forelectricpower.vii.With the acquisitionof FyL's assets,IRHE is now the major electricityundertakingin the Republic,owning, except for captive industrialplant,over90% of the country'sinstallzdgeneratingcapacity.The transformationofIRHE from a small rural supplierinto a nationalpower company has naturallybrought its problems in organizationand management; particularly,there is ashortageof trained personnelin higher echelons.However, with the continueduse of consultantsand a good trahingprogram, it is consideredthat IRHE willovercome present difficultiesand be able to execute its program satisfactorily.viii.IRHE's rapid and acceleratedexpansion has placed a heavy strainonits finances,with the resultthat its financingplan will have to rely heavily,during the years 1973-75, on Government contributions,which will be largelyutilizedin ongoing projects.After 1975 the Govermment hopes that IRHE will beable to raise some of the funds required for local expenditureby the issue ofbonds locally.During the draw down period of the proposed Bank loan (1974-77),approximately17% of the total cost of IRHE's expansion program would be financedfrom internalsources,54% from overseas loans, 14% from Governnent contributionsand 15% from local borrowings.ix.The Projectis a suitablebasis for a Bank loan to IRHE of US 30 millionequivalent,for a period of about 20 years, includinga grace period of aboutfour years.
APPRAISALOF THE THIRD POWERPROJECTINSTITUTO DE RECURSOSHIDRAULICOSY ELECTRIFICACIONPANAMA1.INTRODUCTION1.01The Governmentof Panama has requestedthe Bank to assist in thefinancingof a Projectwhich is part of the 1973-77 expansion program of theInstituto de RecursosHidraulicosy Electrificacion(IRHE),the autonomousagency responsiblefor the installationof all new electricgeneratingcapacityfor public service and for most of the distributionsystem in theRepublic. During the five-yearperiod, IRHE expects to invest about US 169million in this program.1.02The Project proposed for Bank financing comprisesthe additionof25 Mw of thermal generatingcapacityto IRHE's system, about 364 km of transmission and subtransmissionlines and related substations,distributionsystemexpansion,a communicationsystem,a system load dispatchcenter at Panamasubstation,studies,engineeringand technicaltraining. The estimatedcostof the Project is US 38.5 million equivalent,includinga foreign currencycomponent of US 27.3 million, which, with part of the interestduring constructionof US 2.7 million, would be financed by the proposed loan of US 30million equivalent. The 25 Mw of new generatingcapacity (at a cost of aboutUS 3.3 million),togetherwith 28 MW of diesel plant presentlyunder constructionand, with purchasesfrom Panama Canal Company (PANCANAL),willprovide for the system growth until the Bayano units come into operation inthe firsthalf of 1976.The remainder of the projectprovides almost exclusively for IRHE s transmission,distributionand other expansion requirementsfor the three years 1974-1976.1.03This would be the third Bank loan to IRHE. The first,Loan 322-PANof US 4 million equivalentin 1962, was one of the Bank's firstloans forrural electrificationand assistedIRHE in financingthe constructionof the6 MW yeguada hydroelectricprojectand associatedfacilities;the installationof 3 MW of diesel generation;and distributionrehabilitation- all of whichis now in operation.The Second Loan, 6 61-PAN of US 42 million equivalent,signed March 16, 1970, is helping to finance the foreign exchange componentof the:firststage of the Bayano hydroelectricdevelopment (150 MW)and associated transmissionline and substations,steam unit No. 4 (U0 MW) at Bahia LasMinas on the Atlanticcoast and transmissionline to Panama City, 6 MWofdiesel generatingcapacity in the rural areas, expansion of IRHE's distribution systems, and studies,trainingand management consultants'services.There have been significantcost overruns on this Projectand the total costis now estimatedat US 78.6 millionagainst US 58.2 million at the time ofthe appraisal.The increaseof about 35% affectsthe two main items comprisingthe project- the Bayano hydroelectricscheme and Las Minas 40 MWsteam unit.
-2The Governin paragraph 4.03.are discussedin cost estimatesThe increasesment has guaranteed to provide or cause IRHE to be provided with any necessaryThe first unit at Bayano is now expectedfunds to complete this Project.the first half ofhalf of 1976 (originallyin the firstto be in operationSeptember 1973).1975) and Las Minas No. 4 in September 1974 (originallyby theexpected that the loan will be fully disbursedHowever, it is stillclosing date of April 30, 1976.original1.04 Now that it has taken over FyL 'sproblems butorganizationalwith additionalto helpof management consultantsservicesofIRHE in the financingloan would assistIRHE is facedresponsibilities,proposes to continue to use theThe proposedsolve these probiems.such services.was signed with1.05In December 1970, under a UNDPgrant, a contractInc. of USA (MAIN) to make a Hydropower DevelopChas. T. Main International,Study for Panama covering the period 1971-85, for whichment and FeasibilityThis study included a comprehensivethe Bank acted as Executing Agency.survey of the power market in panama and provided the basis for IRHE's 1973isnow proposed for Bank financing,The Project,to 1982 expansion program.aAs part of the study, MAIN finalizedphase of this program.the initialpoier grid by 1982"Master plan" in January 1973, which proposes a national75 MWsteam unit at Las Minas(i) the firstof:based on the installationin 1978, (ii) the Bayano hydro units Nos. 3 and 4 (150 mw) in 1979-80, (iii)stage (2 x 85 mM) of La Fortuna hydropower plant in the Chiriquithe firstProvince near the Costa Rica border in 1981, and (iv) a backbone 230 kVThe ",Masterthe country.system interconnectingtransmissiondouble-circuitPlan' also provides for the additionof at least one 25 MWgas turbine inprior to Bayanocapacity deficienciesJune 1974 to cover IRMH's generatingA companion UNDPstudy, also preparedunits Nos. 1 and 2 being commissioned.of a communication systemby MAIN, provided the basis for the feasibilityas part of the proposed project.and load dispatch center installation(1973 throughIn January 1973, IRHE sent to the Bank a ten-year1.06operatingcosts, revenuesand telephone utilityof its electric1982) forecastStone andrequirementsprepared by IRHE's consultants,and constructionInc. (USA), and based, in part, on Chas. T.Webster Management Consultants,A mission composed of Messrs.Main's Master plan dated November 1972.1973panama in February/MarchAlan A. M. onslow and Helmut Wieseman visitedreport isThis appraisalto appraise the proJect and IRHE's power division.based on the reports of Chas. T. Main and Stone and Webster, and on theof the Bank mission.findings
-3-2.TIE POWERSECTORGeneral2.01Panama, with an area of about 7h,000 km2, has a populationof 1.5million (growingat 3.0% per annum), of which about one-halfis rural. Mostof the urban residentslive in the cities of Panama or Colon. Panama nowranks fourth in Latin Americannations in per capita income which is at theUS 820 level. Since 1968, when the present Governmenttook over, the country'seconomy has been growing at an average annual rate of about 8%. Presentexpectationsare that the economy will continueits recent pace of expansionand the demand for electricityshould therefore continueto grow near therates experiencedin the recent past.Sector Organization2.02The present sector organization,which originatedas a number ofsmall privately-ownedpower companiesand generatingplants, is beingconsolidatedby IRHE, an autonomousstate-ownedgovernmentagency, originally created under Law No. 37 of January 31, 1961, and charged with coordinating and expanding electricalpower generationand distributionthroughoutthe Republic.By 1973, following the acquisitionof Compania Panamena deFuerza y Luz (FyL) (paragraphs2.03 and 3.03) IRHE owned about 90% of thecountry'sinstalledgeneratingcapacity,except for captive industrialplant.2.03I3HE presentlyretailselectricityin Panama province,in theCentral provinces of Cocle, Herrera,Los Santos and Veraguas, and in theeastern provinces of Darien and San Blas, and will shortly supply at wholesale to rvate compa,niesin the towns of Chorrera,Santiago;land in theChiriquiprovince.IRHE used to supply at wholesale the growth requirementsof FyL, a subsidiaryof the Boise Cascade Company (USA), in Panama City andColon. On June 1, 1972 the Government "intervened"FyL and on August 1, 197S,IRHE acquired its assets and liabilitieswhich include telephonesand gas inadditionto electricity.2.04An agreementof 1969 providesfor power and energy sales from IRHE'sLas Minas No. 2 unit to the Panama Canal Company (PANCANAL). Another agreementof 1970 between PANCLNALand FyL providesfor PANCANAL sales of power andenergy to FyL, and for emergency assistance.IRHE and PANCANALare re-negotiating the lattercontractand informallyarranged for maximum mutual assistanceon a "when available"basis.In order to relievea projectedcapacityshortage in the IRHE system, MRHIK'sales obligationunder the 1969 agreement for 30 MWand 210 GWh per year has been suspended for three years (from September 1, 1972).Presently,IRIE and PANCANALinterchangepower and energy,as agreed on a day-today basis.PANCANAL has a generatingcapacityof about 160 MW(excluding30 MW1/ The Governmenthas recentlyacquiredthe distributioncompany in Santiago(1 MWcapacity)and turned it over to IRHE for operation;it is now negotiatingthe acquisitionof %mpresas Electricasde Chiriqui.2/ See Nap IBRD 10469.
-a-floatingplant of the US Army) and had a peak demand bf about 120 MW in 1972;it has no present plane to add further generationcapacityas its load is growing at only 4.5% per annum.Regulati onUntil 1957, the power sector was operatedexclusivelyby private2.05entitiesunder franchisesand without any other Governmentregulation. In1958, the NationalCommissionfor Electric Energy, Telephonesand Gas wasestablishedto regulatethose three industries. Later that year, Law No. 31was passed establishingthe standardsfor regulatingthe electriccompanies.However,the provisionsof the law were not enforceduntil Cabinet Decree No. 6was passed in January 1969 to reform the regulatoryCommission. Certainamendmentshave since been made to the legislation,including one whichsubjectedIRHF to regulation. On June 30, 1970, Law No. 214 was passedno law hasestablishingstandardsfor the regulationof telecommunications;been passed establishingthe standardsfor regulatingthe gas industry,noris it the Government'spresent intention to pass any sucth law.Law No. 31, as amended,(Annex1) provides adequateregulationfor2.06the electricindustry and effectivelyguaranteesa minimum rate of return onnet fixed assets in operation,plus working capital of three months' revenue;the minimum rate in the case of IRFM is 8-3/4L%.Since it is importantthatIIUfS should remain financiallyviable, assuranceshave been obtained duringnegotiations,as it was done for Loan 661-PAN,that the electricitylegislationwill not be amended so as to affect materiallyand adverselythe managementor operationof the Borrower.Sector Facilities2.07The public electric supply comprisesfour regional systems and about50 small and isolated diesel installations. The regional systems are:(a) the MetropolitanSystem with a demand (December1972) of about140 MW atida generatingcapacityof 176 MW;(b) the Wes-tPanama System with a demand of about 6 1W and installedcapacityof 7.5 MWof diesel generators;(c) the CentralProvinces system (whichwas the subject of the firstBank loan to IRH:E) with a demand of 11 MWand capacityof 20 MW;andProvince System of the private EmpresasElectricas(d) the Chliriquide Chiriqui and the Chiriqui Land Company,with a combinedloadof 17 MW and capacityof 22 MW.The existinggeneratingfacilitiesof each of the four interconnectedsystemsare shown in Annex 2 and on Map ITBRD10469.Extensionof the ElectricLtySupplyOver the 10 years 1962-1972,productionof electricityin Panama2.08(excludingPANCANAL) increasedby 265%, from 281 to 1,025 GWh. Generating
-5capacity,which totaled about 240 MWin 1972, has generallyprovidedadequate supply except for recent rationing due to forced outages inIRHE's MetropolitanSystem (paragraph5.02).2.09In 1970, Panama ranked sixth among Latin American republics,interms of per capita generationof electricityfor public service.Consumption of electricityby consumer category has evolved since 1962 as follows:Categoryof overnmentGWh %71.830.789.237.235.838.115.915.3234.0 535.715.513.3100.0The total number of customers in Panama increasedby 70% to about147,000 in the 10 yearsthrough1972.Of the total,about130,000 wereresidentialcustomers,indicatingthat about 48% of the total populationofPanama have electric service;however, in the MetropolitanArea it is estimatedthat about two-thirdsof the populationhave supply. In its 1973-78 expansionprogram, IRHE hopes to increaseits services so that about 80%of the totalpopulationand about 90% of the MetropolitanArea would have supply.Power DevelopmentProgram2.11IRHE's 1973 to 1982 expansionprogram is based on the Master Plan(paragraph1.05) which proposes the installationby 1981 of the first stage(170 MW) of the La Fortuna hydropowerplant in the Chiriquiprovince nearthe Costa Rica border (see Map IBRD 10469). The Master Plan assumes a backbone230 kV double circuit transmissionsystem in operationby 1981, but withoutinterconnectionwith Costa Rica's Instituto Costarricensede Electricidad(ICE)system. As La Fortuna is located about midway between San Jose in Costa Ricaand Panama City (the two major potential markets for La Fortuna) the feasibilityof such an interconnectionshould be studied. The PanamanianGovernmenthasindicated that it would initiate talks with Costa Rica at an early date witha view to joint planning studies for coordinatedexpansion of the ICE and IRHEsystems on an interconnectedbasis. If the Costa Rican Governmentis interestedin the proposal, such studies would be a necessarypart of any Bank appraisal ofthe La Fortuna project. Paragraph 5.05 shows the planned generationadditions1974-84.2.12Expansion of the IRHE transmissionsystem at 230 kV and 115 kV willgenerallybe westward from Bayano permittingtransferof Bayano's hydropowerand m4etropolitan Area thermal generationacross the Panama Canal to the WestPanama, Central and Chiriqui provinces.As transmissionties to Chorrera,Divisa,and later David are established,the presentlyisolatedsystems ofIRHE in the area, and the privatecompanies at Chorrera,Santiagoand Chiriquiwill become part of the nationalinterconnectedsystem and be incorporatedinto the economic dispatchand remote controlfrom IRHE's new dispatchcenter.
As interconnectingties are established,most local diesel generationin theprovinceswill be put on standby or relocated. Annexes 2 and 3 give thecapacitiesand loads, respectively,of the interconnectedsystem as it isextended year by year. IRHE's remote isolatedsystems are not expectedto bejoined to the national system, but their generatingcapacitywill be increasedmainly by the installationof small capacitydiesel units releasedfrom otherparts of the IRHE system.Additional details of the IRHE expansion programare given in Chapter 5.
- 7 -3. THE BORROWERLegislation3.01The Borrower would be the Instituto de Recursos HidraulicosyElectrificacion(IRHE),which is an autonomousagency of the PanamanianGovernment, charged with the task of developingthe electricpower resourcesin the country.3.02IRHE was created by Law No. 37 of 1961, which assignedto it theexclusive right to develop the hydro resources of the country,thereby restricting the expansion of the private companies. In its early days IRHE was small,inexperiencedand subject to considerablepolitical interference,which ledto mismanagementand an unfavorablefinancialposition. During 1968-69discussionswere held between IRHE, the Governmentand the Bank to developnew legislationto improve IRHE's organizationand management. Consequently,in July 1969, Law No. 235 was passed, which replaced Law No. 37, chargingIRHE, inter alia, with the exclusiveright to construct and operate all newsources of generationin the country. This new law gave IRHE a satisfactorybasis on which tocperate as an autonomousagency.3.03In mid-1972 IRHE's role again changed significantlywhen the Government purchased the assets and liabilities of CompaniaPanamena de Fuerza y Luz(FyL), a subsidiaryof Boise Cascade (USA) and vested them in IRHE. Formerly,FyL had concessionsfor the operation of electricity,telephonesand gas servicesin the citiesof Panama and Colon.The Government and the Bank have agreed thatIRHE should be divestedof the telephoneand gas operationsas soon as possible.The Government has decided to create a new autonomous agency to take over thetelephoneoperationspresentlymanaged by IRHE by January 1, 1974.This timingis consiueredto be realisticand accordingly,it is a conditionofeffectivenessof the proposed loan that the assets, liabilities,rights andobligationsrelating to telephonespresently vested in IRHE will be transferredfrom IRHE.3.04The Governmenthas not yet clarified its thinking on the future ofthe gas activities,but it has decided to transfer the gas operationsfrom IRHEno later than June 30, 1974, and, in a letter dated February 28, 1973, hasgiven an assurance to the Bank to this effect. The gas operationsare insignificant - the net fixed assets being less than US 100,000as at ecember31, 1972.Organizationand Management3.05IRHE's Board of Directors is composed of seven members. At prasentthe Chairman is the Vice-Ministerof Planning,and the Vice-Chairman is therepresentativeof the IndustrialAssociation. Other members are representativesof the Bankers' Association,Ministry of Commerce, Engineers'Society andMinistry of Agriculture.The seventh member, who is an electricalengineer,is independent.IRHE's annual operatingand capitalbudgets now have to beapproved by the Ministry of Planning,and, while this detractsfrom theInstitution'sautonomy, the Bank has not objectedsince this procedure shouldimprove overall fiscalplanning in the Republic.
-8-3.06Administrationis entrustedto a DirectorGeneral,presently acapable and experiencedengineer,well qualifiedfor his pressnt appointment.He has been with IRKE for many years and was Chief of IRHE's planningbeforebeing appointedDirectorGeneral in 1968 by the RevolutionaryGovernment.It is essential to the Bank's interestthat IRHE remains competentlymanaged,and, during negotiations,the Governmentconfirmedthat, on the basis of acommitmentalready given under Loan 661-PAN, it will consult with the Bankprior to any new appointmentto the positionof DirectorGeneral.3.07IREE's technicaloperationsare presently organized as shown inAnnex h with al andadministrativefunctions at division and departmentlevel headquarteredinPanama Gity. The MetropolitanDivisionis located in Panama City also andan operatingsection in the Central and West Panama provinces. IRHE employsabout 1,800 people in its electricalactivities(this includesformer FyLpersonnel);this is a reasonablesize of staff.3.08Prior to 1969 IRHE was deficientin suitablestaff in its higherechelonsbut, during the last three to foul years, has managed to build upan adequateteam. However, its capacityhas been severely strainedwiththe absorptionof FyL, because of the departureof several of FyL's personnelin higher positions. Added to this has been the need to fully integrate thepower operationsof the two companies. IRHE has started to tackle the problembut there still remainsmuch to be accomplishedin this field; it has had acontract for management consultingserviceswith Stone and Webster of USAsince 1965 and is continuingto use its services. The take-overhas substantiallyincreasedsystem planning requirementsand IRHE's present organizationalarrangemrentand staffingdoes not provide for effectiveand experiencedsystem planning.In order to completethe integrationand reorganization,IRHE agreed duringnegotiationsto continueto use managementconsultants,acceptableto the Bankto the extent considerednecessaryby IRHE and the Bank.3.09IT-rEhas recently appointeda Directorof Administrationand Financewho reportsto the Director General and who is responsiblefor the coordinationof general administration,finance and administrationof procurement;he appearsto have the appropriatequalificationsfor the job. It would be of great benefitto IRuE if, similarly,a TechnicalDirector were put in charge of the engineering,constructionand operatingdivisionsand of system planning. During appraisal,the DirectorGeneral agreed with this view in principle,but is experiencingdifficultyin findingsomeone who is capable and willingto fillthe job, andhe says it would not be feasibleto appoint a non-Panamanian. During negotiations,IRHE.agreed to create the position of a Director of TechnicalOperationsandfill it with a qualifiedand experiencedperson not later than March 31, 1975,unless,followinga study to be made by its consultants,the terms of referenceof which will have been approvedby the Bank, IRHE and the Bank are satisfiedts technicalmanagementthat IRilEis being carried out efficientlywithout sucha position. The proposedloan would assist in the financingof this study.3.10The management and staffingproblems mentioned above can be resolved,or amelioratedthrough trainingand by the use of consultants.The execution ofthe Projectshould not be affectedby these weaknesses,as IRHE has agreed touse consultantsand enlarge its trainingprogram.U
-9Tariffs*3.11Tariffsin the Rural (former IRHE) Area are substantiallyhigher thanthose in the Metropolitan(former FyL) Area, (see Annex 5 for details).IRHEintends to make a completestudy of its tariffsWhen it has consolidateditsposition following the absorptionof FyL, and of the power companiesinSantiagoand Chiriquiprovince in the near future, with a view to revisingthem so tha
7. Estimated Schedule of Loan Disbursements 8. Load Forecasts 1972-82 9. Return on the Investment 10. Income Accounts 1969 -1972 11. Balance Sheets 1969 -1972 12. Estimated Sources and Applications of Funds 1973 -1978 13. Estimated Income Accounts 1973 -1978 14. Estimated Balance Sheets 1973 -1978 15. Estimated Financial Ratios 1973 - 1978
